Profession's disciplinary body under pressure

WITH AN UNPRECEDENTED workload and limited powers the Accountancy and Actuarial Discipline Board (AADB), the profession’s disciplinary body, is under more pressure than at any point in its short life.

The prominent cases the board is now working on may either make or break the organisation, which has yet to win a major audit case.

The AADB (headed by executive counsel Cameron Scott, pictured) has 17 active cases, among them a number of high-profile investigations including Ernst & Young’s role as auditor of collapsed bank Lehman Brothers, PwC’s audit of investment bank JPMorgan, and, announced last week, KPMG’s audit of BAE Systems.

But how does the AADB resolve its huge caseload and maintain the quality of its work? The tight-knit AADB team of three lawyers and two forensic accountants is led by straight-talking Scottish lawyer Cameron Scott, who must juggle a budget only a fraction of the audit firms he takes on.

Some cases can continue for up to eight years before reaching a conclusion, while others can take an age to investigate, only to be thrown out.

Meticulous approach

A low headcount and a tight budget has forced the body to outsource much of its work. A strange structural quirk of the body means it is cheaper to outsource investigatory work rather than handle it in-house.

Outsourced work is paid for by the accounting institutes, while internal investigations are paid for by the Financial Reporting Council (FRC), which oversees the work of the AADB. To take the pressure off internal budgets, much of the work is completed by outside professional investigators.

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Outsourcing investigations, however, comes with its own set of issues for the body, which must manage its projects remotely and deal with outsourced investigative staff who may not be experts in the highly technical field of audit. The process can run slowly and end up costing the institutes more.

This could change in the near future. The board is in the early stages of overhauling its funding structure and is preparing to approach the accounting bodies to negotiate a new arrangement which may result in more in-house investigators.

If the AADB had its way it would prefer its own crack team of audit investigators, experienced in dealing in the technical issues and the subtleties of the audit process. An in-house team, it’s hoped, will make the body more efficient and speedy.

Former head of the Accountants’ Joint Disciplinary Scheme (JDS) Chris Dickson who, while at the Serious Fraud Office, successfully oversaw the case against Bank of Credit and Commerce International – the biggest fraud in UK history, said audit regulation can be a challenge and cases can drag on but he believes a meticulous app­roach is essential to secure successful prosecutions.

“It is easy for bystanders to say you could have done a much quicker investigation,” he said. “These cases are rightly fought tooth and nail by the firms and if you find you miss a detail you might find that you are quite rightly crucified.”

The JDS had a history of successful prosecutions, but only after exhaustive and time-consuming investigations. Its final investigation, involving Ernst & Young’s audit of Equitable Life, took nine years to be finalised.

Swift investigations may be an almost impossible dream for the regulatory industry. Often outside experts, including practicing auditors, must be brought in – a process frustrated when experts are conflicted by their association with the
target of an investigation.

The AADB’s limited powers also stop it from requisitioning documents from companies. Instead, it must demand documents from registered accountants or via a company’s finance director providing they are a registered accountant.

Early resolution process

Statutory powers may give the body sharper teeth, but could have the unintended consequence of further slowing down the process and making it more bureaucratic.
One major delaying factor occurs when AADB probes take place alongside civil and criminal investigations, which is nearly always the case.

Investigators can often be left waiting for civil or criminal proceedings to finish before they can launch their own case, which dilutes the impact of a court win, sometimes almost a decade on from the original scandal.

One option forward would involve the AADB setting up an early resolution process, similar to the Financial Services Authority, which can lower its fines for companies that co-operate and make particular admissions.

However, some doubt whether this would have the desired affect.

“My gut feeling is that it might not be as helpful as one might think,” Dickson said. “In the case of the Big Four, the amounts involved in the fines is petty cash.”